The dovish elements include:
(1) adding language on "core' inflation (which excludes food and energy prices) running at less than 2%,
(2) characterizing its inflation goal as "symmetric," which means inflation can run above 2% as long as the Fed doesn't think the overshoot will be persistent, and
(3) a dissent in favor of keeping rates unchanged at today's meeting

In addition, while some analysts thought the Fed might increase the pace of projected rate hikes in 2017 and beyond, the Fed left those projections essentially unchanged, with median expectation of three 25 basis point rate hikes in each of 2017 and 2018. In particular, five of the seventeen Fed decision-makers think there should be four or more rate hikes this year, no different than back in December.

The lack of change in the "dot plot" describing short-term rate projections was underscored by almost no change in the economic forecasts for real GDP growth, unemployment, or inflation.

However, the statement wasn't all dovish. After all, the Fed did raise the range for short-term rates by 25 basis points to 0.75% - 1.00%. The Fed also noted a firming in business investment and that its favorite measure of inflation (the PCE price index) was close to the goal of 2%.

From a long-term policy standpoint, we're disappointed by today's statement. We'd like to see the Fed maintain inflation in the 0% to 2% range. By contrast, today's statement reiterates that the Fed is more comfortable with a range centered on 2%, meaning it doesn't have to hasten the pace of rate hikes later this year if PCE inflation hits 2.5%-plus, so long as the Fed's economic projections show it eventually coming back down to 2%. We think that risks a mistake that could lead to much faster rate hikes later on if inflation runs above Fed forecasts.

We still expect the Fed to raise rates three times total in 2017, with the odds of a fourth rate hike more likely than the Fed stopping at two. Economic fundamentals suggest the Fed is already behind the curve and the economy can handle a faster pace of rate hikes. Employment gains remains healthy and nominal GDP – real GDP growth plus inflation – has grown at a 3.2% annual rate in the past two years. Moreover, we are seeing signs of accelerating inflation, with the Fed's favorite measure poised to hit 2.1% when February data arrive at the end of the month.

The bottom line is that the Fed took a big step in the right direction earlier today. Unfortunately, the Fed's language suggests it probably won't take as many of these steps as it should before the year is through.

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